The Reserve Bank has warned banks against cutting lending standards as prices of assets including houses are pushed higher by cheap debt, saying this could leave households and the financial system more vulnerable to future shocks.
Despite the warning, however, the central bank says Australian banks’ lending standards remain prudent and the looming rise in bad debts and insolvencies will be much more modest than feared last year.
The RBA’s Financial Stability Review on Friday reinforced its recent commentary that it is closely watching the surging property market, but it does not believe banks’ credit standards have slipped.
The Review said the financial system had been resilient to the COVID-19 shock and Australia’s banks were in a strong position, but the ultra-low level of interest rates created the risk of excessive borrowing.
It said there was a global risk that a sustained period of rising asset prices could lead to “over-exuberance and extrapolative expectations” including increased used of debt. These risks were greater for leveraged assets, including houses.
“In an environment of accommodative financial conditions with rising asset prices it is particularly important that there is no excessive risk-taking by the financial sector,” it said.
“Increased risk-taking could take the form of looser lending standards for individual loan assessments, or a relaxation of internal limits on the share of riskier loans they make.”
“Even if lenders do not weaken their own settings, increased risk-taking by optimistic borrowers could see a deterioration in the average quality of new lending. This would weaken the resilience of of businesses and households, and so the financial system, to future shocks.”
Read More: Markets Live, Friday 9 April, 2021